The UK stock market opened 2020 relatively strong and remained that way until close to the end of February 2020. Then the Coronavirus began to impact on Europe and round the globe, the stock market is having a torrid time – as an example of this the FTSE 100 fell from 7404 on 21st February to 5366 on 13th March; that’s a 28% reduction in 3 weeks. Over the first quarter we have seen the biggest quarterly fall in in more than three decades, not since Black Monday in October 1987.
Long term investors will have been through this before with the Financial Crisis of 2007-2008, however those who began investing over the last decade will be experiencing their first crash and this is where the wisdom of experience comes into play.
As I have written about in another of our blogs, our general message is to sit tight and stick by basic investment principles:
• Invest for the medium to long term rather than short term gain
• Take a diversified approach.
The latter is about using a variety of funds, looking at different geographical areas, industries and asset classes (equities, bonds and cash). Knee jerk reactions do not tend to lead to good outcomes.
In general terms you should not sell your investment in a falling market, because it is only then you crystallise your loss, turning it from a loss on paper to a real loss. Patience is essential in waiting for the markets to recover.
There is not just investment risk now, staying in cash also has its risk. This differs from investment risk, because you are unlikely to see a significant drop in the value of your current/savings account balance overnight, the risk is much more corrosive over the longer term. With inflation running at 1.7% (Consumer Prices Index (CPI) at Sept 2019) and most accounts now offering little to no interest, the real purchasing power of your cash is diminishing. This is especially so after the Bank of England cut interest rates twice in the last month, down to a historic 0.1%.
Cash certainly has its place in everybody’s finances because it provides an element of peace of mind and is generally easily accessible should you need it. Investing however should hopefully allow for some savings to beat inflation and therefore provide a real return.
Buying Opportunity
Falls in the stock markets can lead to opportunities though, you may just have to be braver to grasp them. This is based on the old adage – buy low, sell high.
The nature of confidence in the markets sees many investors buying into the markets when they are up, often due to the markets sitting higher. To explain: when the FTSE was at 7400, if we assume a share cost £1, then an investment of £10,000 would have bought £10,000 shares. If those shares now cost 72p after a 28% drop, the same £10,000 investment now buys 13,888 shares.
Falls in the markets do provide a buying opportunity.
The unknown is when to buy, because only with the luxury of hindsight, do you know when the bottom of the market is. However just because you don’t know when the bottom is, doesn’t mean you shouldn’t invest, because even by investing now, you’re getting in at a much reduced cost than 2 months ago. You might have to accept some short term pain, if the markets fall further, but better to be in close to the bottom, than miss the bottom altogether – in the past normally the best days in the market have come immediately after the worst days.
Mitigating Risk
We do not know when the bottom of the market will be, but one way to mitigate the timing risk, is to stagger your investment into the markets. We have had many clients use this technique this year and instead of say investing £100,000 in February, we split the investment into £25,000 tranches and invested it over February, March, April and May. This reduces the risk by buying in at different times and allows some flexibility should you want to delay or bring forward the investment of these tranches.
As already mentioned, take a diversified approach. The current Covid19 crisis is global, but it will ultimately effect countries differently. Also, while it will impact on all sectors, some will be hit more than others. The UK Government are getting behind companies with a loan package of £330bn and paying 80% of employee salaries (furlough scheme) allowing companies to continue, but this does not replace lost revenue. Many companies are going to see a decline in revenues and profits, especially for example in the hospitality and travel sectors. Therefore, more than ever it is important to look for investments than can weather this storm and using another old adage, don’t put all your eggs in one basket.
If you would like to discuss investments or regular savings in the current climate, please feel free to contact Condies Wealth and we will happily discuss the options available.
Risk Warning: Different investments have different levels of risk. You should not invest in any financial product if you do not understand its nature or the risks involved. Investments and the income they generate may go down as well as up.